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A
credit score, commonly known as FICO scores, are used by creditors to
determine how good a credit risk you are. It has predictive value for
telling the lender how likely you are to repay a loan or to make
payments on time.

The credit score is calculated using
information in your credit reports. Usually each person living in the
United States who has a Social Security number, whether a citizen or
not, will have three versions of credit reports to their name.
Equifax, Experian and TransUnion are three companies collect your
credit information and provide your credit report (also known as
credit profile) to your lenders/creditors.

The credit score is based on a model derived from analysis of
past credit history of thousands of people. Based on the collective
"credit history" of thousands of people with financial
profile similar to yours, the credit score tries to estimate your
future behavior in respect to repayment of your loans, making timely
payments, etc.

Described below are thefive main categories of information on your credit report that
are used in the calculation of your credit score, along with their
general level of importance. Within these categories is a complete
list of the information that goes into a FICO score. Be aware that:

– A
score takes into consideration all these categories of information,
not just one or two. No
one piece of information or factor will determine your score.

– The
importance of any factor depends on the overall information in your
credit report. For some
people, a given factor may be more important than for someone else
with a different credit history. In addition, as the information in
your credit report changes, so does the importance given any one
factor in determining your score. Because the details of your
financial situation are unique, and the exact formula used in
calculation of your credit score is kept secret, it is not possible to
predict what factors will bear the most weight in your situation.
Thus, it’s impossible to say exactly how important any single factor
is in determining your score – even the levels of importance shown are
for the general population, and will be slightly different for
different credit profiles. What’s important is the mix of
information, which varies from person to person, and for any one
person over time.

– Your
score only looks at information in your credit report.
Lenders look at many things when making a credit decision, including
your income and the kind of credit you are applying for. However, your
FICO score does not reflect these facts, as it only evaluates your
credit report at the credit reporting agency.

– Your
score considers both positive and negative information in your credit
report. Late payments
will lower your score, but having a good record of making payments on
time will raise your score.

– Your
score does not consider your ethnic group, religion, gender, marital
status and nationality.
These are, in fact, prohibited from use in scoring by US law.

The Five Things That
Count

1)Payment
History:
Approximately 35% of your scoreis based on your Payment History.

The first thing any lender would want
to know is whether you have paid past credit accounts on time. This is
also one of the most important factors in a credit score. However,
late payments are not an automatic "score-killer." An
overall good credit picture can outweigh one or two instances of, say,
late credit card payments. By the same token, having no
late payments in your credit report doesn’t mean you will get a
"perfect score." Some 60-65% of credit reports show no late
payments at all — your payment history is just one piece of
information used in calculating your score.

Your score takes into account:

–
Payment information on many types of accounts.
These will include credit cards (such as Visa, MasterCard, American
Express and Discover), retail accounts (credit from stores where you
do business, such as department store credit cards), installment loans
(loans where you make regular payments, such as car loans), finance
company accounts and mortgage loans.

– Public
record and collection items – reports of events such as bankruptcies,
judgments, suits, liens, wage attachments and collection items.
These are considered quite serious, although older items will count
less than more recent ones.

–
Details on late or missed payments and public record and collection
items – specifically, how late they were, how much was owed, how
recently they occurred and how many there are.
A 30-day late payment is not as risky as a 90-day late payment, in and
of itself. But recent payments and frequency count too. A 30-day late
payment made just a month ago will count more than a 90-day late
payment from five years ago. Note that closing an account on which you
had previously missed a payment does not make the late payment
disappear from your credit report.

– How
many accounts show no late payments.
A good track record on most of your credit accounts will increase your
credit score.

2)
Amounts Owed:About 30% of your scoreis based on Amounts
Owed.

Having credit accounts and owing money
on them does not mean you are a high-risk borrower with a low score.
However, owing a great deal of money on many accounts can indicate
that a person is overextended, and is more likely to make some
payments late or not at all. Part of the science of scoring is
determining how much is too much
for a given credit profile.

Your score takes
into account:

– The
amount owed on all accounts.
Note that even if you pay off your credit cards in full every month,
your credit report may show a balance on those cards. The total
balance on your last statement is generally the amount that will show
in your credit report.

– The
amount owed on all accounts, and on different types of accounts.
In addition to the overall amount you owe, the score considers the
amount you owe on specific types of accounts, such as credit cards and
installment loans.

–
Whether you are showing a balance on certain types of accounts.
In some cases, having a very small balance without missing a payment
shows that you have managed credit responsibly, and may be slightly
better than no balance at all. On the other hand, closing unused
credit accounts that show zero balances and that are in good standing
will not generally raise your score.

– How
many accounts have balances.
A large number can indicate higher risk of over-extension.

– How
much of the total credit line is being used on credit cards and other
"revolving credit" accounts.
Someone closer to "maxing out" on many credit cards may have
trouble making payments in the future.

– How
much of installment loan accounts is still owed, compared with the
original loan amounts.
For example, if you borrowed $10,000 to buy a car and you have paid
back $2,000, you owe (with interest) more than 80% of the original
loan. Paying down installment loans is a good sign that you are able
and willing to manage and repay debt.

3)
Length of Credit History:
About 15% of your scoreis based on
Length of Credit History.

In general, a longer credit history
will increase your score. However, even people with short credit
histories may get high scores, depending on how the rest of the credit
report looks.
Your score takes into account:

– How
long your credit accounts have been established, in general.
The score considers both the age of your oldest account and an average
age of all your accounts.

– How
long specific credit accounts have been established.

– How long it
has been since you used certain accounts.

4) Are You Taking on
More Credit:
About 10% of your scoreis based on New
Accounts.

People tend to have more credit today
and to shop for credit – via the Internet and other channels – more
frequently than ever. Fair, Isaac scores reflect this fact. However,
research shows that opening several credit accounts in a short period
of time does represent greater risk – especially for people who do not
have a long-established credit history. This also extends to requests
for credit, as indicated by "inquiries" to the credit
reporting agencies – an inquiry is a request by a lender to get a copy
of your credit report.

The scores distinguish between searching for many new credit accounts
and rate shopping, which is generally not associated with higher risk.
In part, this is handled by treating a grouping of inquiries – which
probably represents a search for the best rate on a single loan – as
though it was a single inquiry.

Your score takes
into account:

– How
many new accounts you have.
The score looks at how many new accounts there are by type of account
(for example, how many newly opened credit cards you have). It also
may look at how many of your accounts are new accounts.

– How
long it has been since you opened a new account.
Again, the score looks at this by type of account.

– How
long it has been since you opened a new account.
Again, the score looks at this by type of account.

– How
many recent requests for credit you have made, as indicated by
inquiries to the credit reporting agencies.
Note that if you order your credit report from a credit reporting
agency — such as to check it for accuracy, which is a good idea —
the score does not count this. This is considered a
"consumer-initiated inquiry," not an indication that you are
seeking new credit. Also, the score does not count it when a lender
requests your credit report or score in order to make you a
"pre-approved" credit offer, or to review your account with
them, even though these inquiries may show up on your credit report.

– Length
of time since credit report inquiries were made by lenders.

–
Whether you have a good recent credit history, following past payment
problems.
Re-establishing credit and making payments on time after a period of
late payment behavior will help to raise a score over time.

5) Types of Credit
in Use:
About 10% of your score
is based on Types of Credit in Use.

According to the
information provided by the Fair & Isaac, the creater of FICO
credit score, about 10% of your credit score is based on:

– What
kinds of credit accounts you have, and how many of each.
The score is a complex formulat that takes into account both the types
of account, their mix and the total number of credit accounts you have
under your name.

– Credit
account types include:
credit cards, retail accounts, installment loans, finance company
accounts and mortgage loans. In general, the effect of how many
accounts you have and their mix would vary with your income and other
factors. It is not recommended that you open new accounts just to
"diversify" your credit profile. This part of the credit
score is more important if you do not have a lot of other credit
information on your file, as would happen for example to young adults.

Final Word:
If you are totally confused at this point – don’t feel alone. The best
way to not have to worry about a negative profile, is to make your
payments on time. It’s much easier (although it might not be EASY) to
pay on time than spending years cleaning up a negative credit history.

The three major Credit Bureaus have
their own criteria on how to read your credit report. But they all
share the same information. In the past years they made their credit
reports clearer so people can understand it easily.

Items Include:

Basic Information
Name, Address, Date of Birth, Social Security number and spouse’s
name.

Credit and Payment History
Listing of companies that have loaned you money in the past, along
with the account numbers, size of your credit lines, dates the lines
were opened, dates you last used the credit lines, lines’ repayment
terms, amounts you presently owe, status of your payments and number
of months your payments are past due.

Collection Agencies
Those assigned to collect overdue debts, including original creditor’s
name, which collection agency oversaw which account, the amount it
tried to collect and whether you paid.

Courthouse Records
Federal, state or local courts showing liens, bankruptcy filings or
other judgments.

Additional History Information
Former addresses, employers, etc.

Inquiries
Listing of inquiries made by potential credit grantors like credit
card companies.